London Gold Fix

Trading gold in London has a long history which goes back over three hundred years, but gold fixing, or the London Gold Fix as it is now known, was only formalised after the first World War in 1919. The concept of fixing, originated from the silver market, and the underlying principle is to provide market participants with the opportunity to buy and sell gold at a single quoted price. Since 1919 a small and elite group of bankers have met in the City of London ( other than in wartime or major emergencies) to agree a rate for the price of gold, commonly known as the London Gold Fixing, or Gold Fix for short. Historically these meetings have taken place twice daily at the offices of NM Rothschild, but since 2004 the prices have been agreed by morning and afternoon telephone calls between the members. The following is kindly reproduced from the London Bullion Market Association and explains the principles and process involved in the London gold fix:

“The Fixings are an open process at which market participants can transact business on the basis of a single quoted price. Orders can be changed throughout the proceedings as the price is moved higher and lower until such time as buyers’ and sellers’ orders are satisfied and the price is said to be ‘fixed’. Orders executed at the fixings are conducted as principal-to-principal transactions between the client and the dealer through whom the order is placed. The fixings are the internationally published benchmarks for precious metals. They are fully transparent and are therefore used to deal in large amounts, or to achieve the accepted average price of the metal. As a benchmark, many other financial instruments are priced off the fixing, including cash-settled swaps and options. The silver fixing started in 1897 and the gold fixing in 1919.The Gold Fixing is conducted twice a day by telephone, at approximately 10:30 am and 3:00 pm. There are five Gold Fixing members – all of whom are Market Making members of the LBMA. They are the Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA, NA and Société Générale. The chairmanship of the Gold Fixing rotates annually amongst its members. Three Market Making members of the LBMA conduct the Silver Fixing meeting under the chairmanship of The Bank of Nova Scotia–ScotiaMocatta by telephone at 12.00 noon each working day. The other two members of the Silver Fixing are Deutsche Bank AG and HSBC Bank USA, NA. Clients place orders with the dealing rooms of fixing members, who net all orders before communicating their interest to their representative at the fixing. The metal price is then adjusted to reflect whether there are more buyers or sellers at a given price until such time as supply and demand is seen to be balanced. Throughout the proceedings customers may change their orders, at which point the fixing member will raise a small flag to visually convey to the other members that they are changing their order. The price cannot be ‘fixed’ whilst a flag is raised. The fixing is an open transparent process that allows customers to be kept advised of price movements, together with the changes in the level of interest, while the fixing is in progress such that they may cancel, increase or decrease their interest dependent upon this information.”

Now before you run away with the idea that this fixes the price of gold until the afternoon session – think again!! This is NOT the case. The fix price is the price at the exact instant in time at which it is agreed. Within seconds it will be trading at different prices. Amateurs, and also many who should know better, may then wonder what is the point, and why it is called a fixing price. The simple answer is that the five members use it to establish a market price which is fixed only for that precise moment, at which they can balance their sales and purchase requirements, including orders and commissions from clients. Many major bullion traders and dealers use the London gold fixing as a basis for transactions with other professionals, whilst most private individuals prefer to deal at the current quoted spot price. When traders deal on the basis of a London fix, it will always be a future fix, often the next one, but not necessarily. They may agree to buy, or sell as the case may be, a fixed amount of gold in the form of bars, Krugerrands, sovereigns, or other gold bullion formats, at either a percentage or a fixed amount relative to the fix. Neither party knows what the actual striking price will be, but this is usually not a problem. It is also possible to place a conditional order, for example to buy 500 ounces at the next fix, subject to a limit, so that if the fix is above a certain level the transaction will not be concluded. The concept of dealing at an unknown price may seem strange to some, but for most gold professionals, any plusses and minuses usually average out over a period period of time. It saves much time which would be wasted in haggling about two different views of the market. Many people, including most of the media, are under the impression that the gold price is fixed in US dollars. It is actually fixed in UK pounds sterling (GBP), and Euros also, although the Euro pricing is fairly new. Strangely, whenever you see a gold fix price quoted, it will almost always be in dollars. This applies even in the UK.